8.2.2.1.4 Conclusions: Interest and Limits of Aggregate Analysis

A lesson from this section is that, despite their great diversity, the findings
of empirical models confirm the theoretical diagnosis. Revenue-raising instruments
such as carbon taxes or auctioned emissions permits are, if properly utilized,
the most efficient instrument for minimizing the aggregate welfare losses (or
maximizing the welfare gains) of climate policies.

It should be noted however, that, even if the only one available study for China
suggests that opportunities for revenue recycling exist in developing countries,
no swapping generalization can be made at this stage. While theoretical modelling
and empirical evidence suggest that such opportunities are available in many
OECD countries, developing countries in many cases start from a different fiscal
baseline (e.g., fewer entrenched distortionary payroll taxes). They also have
other potentially underused tax bases that may become more developed as their
economies grow at rates that typically exceed growth rates in OECD countries.
In developing countries, direct welfare losses associated with a carbon tax
may, therefore, reduce opportunities for mitigation within the fiscal reform
policy envelope. At this stage, however, insufficient evidence exists either
to confirm or to substantiate these hypotheses; studies to date have mainly
concentrated on developed countries and their conclusions may not be directly
transferable.

Beyond controversies about the capacity of government to warrant fiscal neutrality,
that is the fact that the total fiscal burden remains unchanged, the adoption
of carbon taxes or auctioned permits confronts the fact that their enforcement
must be done in the heterogeneity of the real world, and can have very significant
distributive implications:

Across economic sectors. The carbon content of the steel, aluminium,
cement, basic chemical, and transport industries are, indeed, four to five
times higher per unit of value added than for the rest of industry. For unilateral
initiatives, carbon taxes drastically impact the competitiveness of these
sectors (with potential economic shocks at the regional level); even with
an internationally co-ordinated policy, their equity value will be lowered
compared with the rest of industry.

Across households income groups. Carbon taxation increases the relative
prices of energy services such as heating, lighting, and transport. The resultant
impact on welfare is then more negative for low income levels and people living
in cold areas and in low density areas. It is also higher for high income
groups and more beneficial for medium income groups in case of swap with other
taxation.

Economic analysis can define the compensation necessary to offset these negative
distributional effects but, in the real world, winners cannot (or are not willing
to) compensate losers. This is especially relevant when the losers suffer heavy
impacts and the winners enjoy only marginal gains, which leads to the so-called
political mobilization bias (Olson, 1965; Keohane and Nye, 1998) when the losers
are more ready to organize a lobbying and incur mobilization costs than the
winners (Williamson, 1996). Under such circumstances, policies yielding the
largest aggregate net benefits may prove very difficult to enforce. Economic
models provide no answer to this issue, but can try to frame the debate by providing
the stakeholders with appropriate information. This is the objective of Sections
8.2.2.2 and 8.2.2.3.